Energy, Food Prices Helped Slow Inflation in 1991

By Stewart, Kenneth J. | Monthly Labor Review, May 1992 | Go to article overview

Energy, Food Prices Helped Slow Inflation in 1991


Stewart, Kenneth J., Monthly Labor Review


The major cause. of lessened inflation in 1991 was the decline in energy prices, following a runup due to concerns about the Persian Gulf war; slack economic conditions and movements infoodprices also curbed inflation.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 3.1 percent in 1991, following a 6. 1-percent advance in 1990.' The 1991 price rise was the lowest annual rate of increase since a 1.1-percent advance was posted in 1986, and the second smallest since 1967. Sluggish economic conditions tended to dampen inflation, but developments for energy and food were major factors in the general slowing of consumer price increases.

The economy

The sluggish economy reduced inflationary pressure on consumer prices during 1991, as the recession that officially began in July 1990 continued. On an annual basis, real gross domestic product remained relatively flat in both 1990 and 1991. The civilian unemployment rate, which rose from 6.1 percent in December 1990 to 7.1 percent in December 1991, has generally been increasing since the recession began. And although consumer confidence, as measured by the Conference Board, turned up briefly in firstquarter 1991 following the outcome of the war in the Persian Gulf, it declined later in the year.

The cost of labor and materials also moderated in 1991. Total labor compensation costs paid by U.S. employers (which include wages, salanes, and benefits paid to employees in private industry and State and local government) increased 4.3 percent in 1991 after advancing 4.9 percent in 1990. The Producer Price Index for finished consumer goods excluding energy rose only 1.6 percent in 1991, its smallest annual increase since 1987. As a result, the cpi for commodities rose only 1.2 percent in 1991, the smallest rise in 5 years.

Energy and food prices

Energy. As the acceleration of inflation in 1990 was due primarily to a sharp increase in petroleum-based energy prices, the moderation in 1991 was caused largely by a drop in these prices.

Prices for energy, particularly for energy commodities such as motor fuel and fuel oil, skyrocketed with the Iraqi invasion of Kuwait in early August of 1990. Prices for energy commodities rose 27.9 percent from July to October 1990, the sharpest 3-month increase ever recorded. Prices for motor fuel reached an all-time high in November 1990, as speculation associated with the risks to supply drove up crude oil prices.

The oil shortage anticipated because of the hostilities in the Middle East never materialized, however. As prices on world oil markets soared, other oil-producing countries quickly increased production, making up for the loss of Iraqi and Kuwaiti oil. Crude oil prices stabilized as supplies became more plentiful and secure and as fears of further Iraqi aggression, particularly against Saudi Arabia, dissipated.

With increasingly reliable and ample oil supplies, energy prices started to fall even before the air war against Iraq by United Nations coalition forces began in January 1991. Prices for energy commodities fell 18.5 percent from December 1990 to March 1991, the second sharpest 3 -month decline on record. This dramatic decrease occurred despite the December 1990 increase of 5 cents per gallon in the Federal tax on gasoline.

For calendar year 1991, prices for energy commodities fell 16.1 percent, after rising 35.4 percent in 1990. Except for a 30.5-percent drop in these prices caused by the collapse of oil prices in 1986, the 1991 drop in prices for energy commodities represented their steepest annual decline since the data series was first published in 1957. Motor fuel and fuel oil prices fell 16.0 and 19.9 percent, respectively, in 1991, after increasing 36.5 and 29.9 percent in 1990.

Food. Food prices rose 1.9 percent in 1991. This compares with a 5.3-percent advance in 1990, and represents the smallest annual increase in food prices since a 0. …

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